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Disqualification numbers increasing – directors beware!

The Insolvency Service’s latest statistics report a significant increase in the number of director disqualifications. Statistics released for the period January to March 2016 show that in the first three months of this year the Insolvency Service made 390 director disqualifications. This represents a 56% increase on the period in the previous year.  

The increase in the number of director disqualifications is a concern for directors of struggling businesses, particularly as we may see numbers increase even further as a result of new reporting rules which came into force in April 2016. Under the new reporting rules office holders are required to submit a report to the Disqualification Unit on the conduct of all directors for any insolvencies starting on or after 6 April 2016. Previously office holders only needed to submit a report where particular concerns were identified about a director’s conduct. The new reporting rules are likely to result in closer scrutiny of director conduct generally.

Why should directors be concerned by these statistics?

The Secretary of State can seek a disqualification order, or direct the Official Receiver to bring a claim against a director, when there are concerns about the fitness of a director. The most common ground for seeking a disqualification order is unfit conduct.  Unfit conduct covers a wide range of matters and there are a number of factors the Court can take into account in determining unfitness. Examples include breach of duty, failure to pay tax, failure to keep up to date books and records, failure to file accounts and the misapplication of company funds or property.  

The effects of a disqualification order are severe. A disqualification order prevents an individual from being a director of a company during the disqualified period. It also prevents an individual from being concerned or taking part in the promotion, formation or management of any company and can impact on an individual’s board appointments, as well as any charitable roles. The maximum period an individual can be disqualified is 15 years and the minimum period is 2 years. The length of disqualification will depend on the gravity of the offence, but any disqualification order is likely to have a negative effect on an individual’s career, earning potential and appointments.

Why have we seen an increase in the number of disqualification orders being made?

The Insolvency Service have said that the increase in the number of disqualification orders shows that they are tackling director misconduct. The Insolvency Service appear to be pursuing more investigations and adopting a more robust approach towards director misconduct; however, the increase may also be the result of a number of new measures that came into force at the end of last year following the introduction of the Small Business, Enterprise and Employment Act 2015. These new measures extended the period in which the Secretary of State can apply for a disqualification order against a director from within 2 years of the company going into liquidation to 3 years. They also extended the circumstances in which a disqualification order can be made. As a result of these changes, the Court can now consider any offences committed by an individual overseas when they consider whether to make a disqualification order in this jurisdiction. The Court can also make orders against individuals who have influenced the conduct of a disqualified director. This has extended the scope of disqualification orders generally.

Over the last year or so we have also noticed that the Insolvency Service appear to be closely scrutinising the management of liquidated companies where significant debts are owed to the Crown (whether in relation to VAT, corporation tax, PAYE or national insurance). This may have impacted on the number of disqualification orders being made because  in many of these cases voluntary disqualification undertakings may be given before proceedings are issued and before the director’s conduct is scrutinised by the Court. 

All of these factors are likely to have had an impact on the number of orders being made. These statistics should serve as a warning for directors to carry out their duties honestly and responsibly and with proper regard to the interests of creditors, otherwise the consequences can be severe.

We regularly advise directors on their duties and how they can comply with the law and relevant regulations in the performance of those duties. We also regularly assist individuals in completing Director Disqualification Questionnaires, responding to disqualification investigations by the Insolvency Service, negotiating voluntary disqualification undertakings and defending disqualification proceedings.

If you have any queries about any of the issues raised in this article, or require advice on directors’ duties, disqualification proceedings or voluntary undertakings please contact Rachel Brown in our Litigation and Dispute Resolution team on 0207 216 5562 or by email at r.brown@druces.com

This news was posted on 22 July 2016.

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